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District Court Allows Direct and Contributory Infringement Claims Against Operators of ''Cyberlocker'' Websites to Proceed

Jessica McKinney | Bloomberg Law Perfect 10, Inc. v. Megaupload Ltd., No. 11-CV-00191, 2011 BL 195218 (S.D. Cal. July 27, 2011) In an action filed by adult entertainment company Perfect 10, Inc. against Megaupload Ltd., the operator of various "cyberlocker" websites, and its founder, the U.S. District Court for the Southern District of California granted in part and denied in part defendants' motion to dismiss. Notably, and in contrast to the recent decision in Disney Enterprises, Inc. v. Hotfile Corp., No. 11-CV-20427, 2011 BL 182923 (S.D. Fla. July 8, 2011), the court found that Perfect 10 plausibly alleged volitional conduct by Megaupload, and thus allowed Perfect 10's direct infringement claim to proceed. The court also allowed Perfect 10's contributory infringement claim to proceed, finding that Perfect 10 sufficiently pleaded specific knowledge of infringement, as well as its unfair competition and trademark dilution claims. However, the court dismissed without prejudice Perfect 10's vicarious infringement, trademark infringement, and publicity rights claims.

Megaupload's Websites

Megaupload, which refers to itself as a "file storage" company, operates the megaupload.com, megaporn.com, megarotic.com, megavideo.com, and megaclick.com websites, among others. Megaupload at 2. As alleged in Perfect 10's complaint, users may upload files to these websites. Once a file is uploaded, Megaupload assigns it a unique Uniform Resource Locator ("URL"). The URLs are then disseminated over the Internet by Megaupload and its users. Anyone with access to a URL may download the file associated with it. Members of the Megaupload websites (who have paid a membership fee) may view, copy, or download files without waiting. Through its "Rewards Programs," Megaupload allegedly encourages users to upload files. It rewards one point for each qualifying download of a file, and the more a particular file is downloaded, the more reward points a user can earn. Megaupload pays users $10,000 once they accumulate 5,000,000 reward points. In addition, Megaupload "apparently depends on, and provides substantial payouts to, affiliate websites who catalogue the URLs providing access to the mass of 'pirated' content on Megaupload's servers." Id. at 3. Perfect 10 filed suit against Megaupload and its founder, Kim Schultz (collectively, "Megaupload"), asserting federal claims of direct, contributory, and vicarious copyright infringement; trademark infringement and dilution; and state law unfair competition and right of publicity claims. Megaupload moved to dismiss the complaint.

The court explained that an important element of a direct copyright infringement claim is the element of volitional conduct. See, e.g., Religious Technology Center v. Netcom On-Line Communication Services, Inc., 907 F. Supp. 1361 (N.D. Cal. 1995). Specifically, "something more must be shown than mere ownership of a machine used by others to make copies." CoStar Group, Inc. v. Loopnet, Inc., 373 F.3d 544, 550 (4th Cir. 2004). Citing Netcom and its progeny, Megaupload argued that it did not act volitionally because the works at issue were uploaded by third parties to its servers. The court found, however, that Megaupload "serves as more than a passive conduit, and more than a mere 'file storage' company." Megaupload at 7. According to the court, the following allegations sufficed to demonstrate volitional conduct: (1) Megaupload's creation of "distinct websites, presumably in an effort to streamline users' access to different types of media (e.g., megaporn.com, megavideo.com)"; (2) that it "encourages and, in some cases pays, its users to upload vast amounts of popular media through its Rewards Programs"; (3) that it "disseminates URLs for various files throughout the internet"; (4) that it "provides payouts to affiliate websites who maintain a catalogue of all available files"; and (5) "at a minimum, it is plausibly aware of the ongoing, rampant infringement taking place on its websites." Id. The court cited Arista Records LLC v. Usenet.com, Inc., 633 F. Supp. 2d 124, 147 (S.D.N.Y. 2009), and Capitol Records, Inc. v. MP3tunes, LLC, 93 U.S.P.Q.2d 1282 (S.D.N.Y. 2009), in support of its conclusion. As volitional conduct was the only contested issue, the court denied Megaupload's motion to dismiss the direct infringement claim. The court's analysis of the direct infringement claim stands in contrast to the recent decision in Disney Enterprises, Inc. v. Hotfile Corp., No. 11-CV-20427, 2011 BL 182923 (S.D. Fla. July 8, 2011), in which the Southern District of Florida held that the plaintiffs failed to allege that the defendants—which operate a similar "cyberlocker" website, hotfile.com—acted volitionally, and rejected plaintiffs' argument that defendants' alleged creation of a business plan that induced infringement supported the claim. For further analysis of the Disney Enterprises opinion, see District Court Dismisses Movie Studios' Direct Infringement Claim Against Operators of "Cyberlocker" Website But Allows Secondary Infringement Claims to Proceed, Bloomberg Law Reports – Intellectual Property, Vol. 5, No. 30 (July 25, 2011).

Contributory Infringement Claim Allowed to Proceed

"In the internet context," the court explained, "'a computer system operator can be held contributorily liable if it has actual knowledge that specific infringing material is available using its system, and can take simple measures to prevent further damage to copyrighted works, yet continues to provide access to infringing works.'" Megaupload at 8 (quoting Perfect 10, Inc. v. Amazon.com, Inc., 508 F.3d 1146, 1172 (9th Cir. 2007)). Megaupload asserted two arguments with respect to the contributory infringement claim: (1) that Perfect 10 failed to allege direct infringement by a third party, a necessary element of the claim, and (2) that Perfect 10 failed to allege that Megaupload had actual knowledge of specific infringement. As to the first argument, the court noted that Perfect 10 had not detailed the specific items that were allegedly uploaded in its complaint, but that it alleged that it sent 22 takedown notices to Megaupload. Specific items were referenced in the cover page to at least one of the notices. "Drawing all reasonable inferences in Perfect 10's favor—including Megaupload's election to submit incomplete copies of the 22 takedown notices," the court found that Perfect 10 sufficiently alleged direct infringement by a third party. Id. As to the second argument, Megaupload contended that only one of the 22 takedown notices related to Perfect 10 works, and even though Megaupload was not required to respond to that notice because it was deficient, that its response to the notice was in any event adequate. The court acknowledged that only one notice was applicable to Perfect 10, but refused to consider the sufficiency of the notice because Megaupload had submitted an incomplete copy of it. The court also noted "some doubt among courts as to whether a takedown notice automatically implies knowledge," citing Flava Works, Inc. v. Gunter, No. 10-CV-06517, 2011 BL 123975 (N.D. Ill. May 10, 2011). Megaupload at 9. For further analysis of the Flava Works case, see Court Dismisses Direct and Vicarious Infringement Claims Made by Adult Film Company Against Social Networking Site but Allows Contributory Infringement Claim to Proceed, Bloomberg Law Reports – Intellectual Property, Vol. 5, No. 21 (May 23, 2011). The court concluded, however, that other allegations in the complaint (highlighted in its discussion of the direct infringement claim) satisfied the specific knowledge requirement. "Under the circumstances of this case," the court stated, "if Megaupload lacks knowledge of infringing activity, Plaintiff's allegations suggest such a lack of knowledge is willful." Megaupload at 9. The court thus denied Megaupload's motion to dismiss the contributory infringement claim.

Vicarious Infringement Claim Dismissed Without Prejudice

The contested issue with respect to the vicarious infringement claim was whether Megaupload has the right and ability to supervise infringing conduct. Perfect 10 argued that Megaupload's ability to terminate users' access to its servers satisfies this element, citing A&M Records, Inc. v. Napster, Inc., 239 F.3d 1004, 1023-24 (9th Cir. 2001). The court disagreed, noting that Perfect 10 failed to allege that Megaupload "has a closed system requiring user registration," as in Napster, or to "explain how files are uploaded." Megaupload at 10. Accordingly, the court dismissed the vicarious infringement claim without prejudice.

Trademark Claims

Because Perfect 10's trademark infringement claims "appear[ed] to arise largely from the potential for confusion as to the source of Perfect 10's creative works," the court found that the claims were precluded by the U.S. Supreme Court's decision in Dastar v. Twentieth Century Fox Film Corp., 539 U.S. 23 (2003). Megaupload at 12. The court dismissed the trademark claims without prejudice so that Perfect 10 could amend its complaint to more explicitly state its allegations of trademark infringement. The court denied Megaupload's motion to dismiss the dilution claim, however, as Perfect 10 had sufficiently alleged that cause of action and Megaupload pointed to no cases finding that Dastar precludes such claims.

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